Railroads have been kicked around so much in recent years it hardly seems possible that they're the one transportation sector that's in a position to gain favor with shippers, especially in a business climate that is so tough on global supply chains. The challenges range from rising fuel costs to keeping up with increased security measures and growing freight volumes from Asia, and every transportation sector is feeling the pressure.

It's therefore ironic that railroads have emerged over the past year as one of the most reliable links in the supply chain, despite some occasional service stumbles. The real test is ahead, though, and all eyes are on the industry to see if they'll be able to keep up with supply chain demands that will continue to become even more relentless.

An injection of capital

Last year, railroads posted very strong earnings, and much of that is starting to be pumped back into much needed capital improvements. The nation's largest railroad, Omaha-based Union Pacific Corporation (www.up.com), reported 70 percent growth in 2005 net income to $1.03 billion, while revenue rose 11 percent to $13.6 billion. Fort Worth-based Burlington Northern Santa Fe Corp. (www.bnsf.com), the second biggest rail carrier, earned a record $1.5 billion, a 93 percent gain, on revenue of $13 billion. CSX Corp. (www.csx.com) and Norfolk Southern (www.nscorp.com)-ranked third and fourth, respectively-also reported impressive gains.

At the same time, the rail industry's biggest revenue generator-coal-ended its 102-year domination in 2003, giving way to cargo containers, whose growth has showed no signs of letting up. Containerized cargo is also more expensive to transport compared to commodities like coal and grain, which has also contributed to the railroads' financial health.

BNSF Railway says it will put $2.4 billion in its capital commitment program this year, which is about 10 percent more than last year. Roughly $400 million of that amount will go towards track and facilities investments to expand capacity, particularly for coal, agricultural products, industrial products, and intermodal customers.

Matthew K. Rose, Burlington Northern Santa Fe Corp. Chairman, President and CEO, said recently, “We are increasing our capital investment program in 2006 to meet anticipated future volumes because we are confident that our Return on Invested Capital (ROIC) will continue to improve. For 2005, ROIC was 10.1 percent, a significant improvement from 7.9 percent in 2004 and 6.6 percent in 2003.” He added that the company will spend over $1.4 billion this year “to keep our infrastructure strong by replacing track, signal systems, structures, rebuilding rolling stock, and implementing new technologies. Compared to 2005, this represents an increase of about $100 million. Also, we will acquire 310 locomotives at a cost of about $550 million.”

Union Pacific has announced it will spend roughly $2.7 billion in 2006, slightly less than the $2.9 billion spent last year. The company will invest in 145,000 tons of new rail, 200 additional locomotives, 2,700 new or leased rail cars, and hire an additional 3,600 trainmen and engineers.

While all that sounds like a lot, the cost of adding additional rail lines is about $1 million to $2 million per mile. So, “we can't afford to put line in just anywhere,” explained John Lanigan, BNSF Railway Chief Marketing Officer. “We have to be able to spot demand years in advance, then adapt our business to it.” Indeed, adding capacity quickly is something that railroads simply can't do. “Boosting capacity takes time and is based on long-term plans” rather than short-term inventory crunches, remarked Thomas Kraemer, head of BNSF's coal business unit.

One of the hot spots for intermodal rail activity is Southern California. Fortunately, a lot of the money the railroads will be investing this year will be earmarked for that region. In addition, California Governor Arnold Schwarzenegger's $222 billion infrastructure proposal could turn out to be a nice supplement to what the railroads are already spending-and it's sorely needed. Freight trains are competing with commuter trains on many rail lines, which are causing delays for both cargo and commuters. On a typical day in the Los Angeles basin, 114 freight trains move on mainline rail tracks, which are shared with 70 commuter trains. By 2010, train traffic is estimated to grow by 44 percent to about 165 freight and 100 passenger trains each day, according to the Southern California Association of Governments.

The governor's plan calls for spending billions of dollars on rail line improvements, such as adding tracks, creating grade separations, and expanding cargo loading facilities. Not only will this boost rail efficiency, it will cut down on truck traffic and reduce diesel pollution.

“The governor's plan is a good step forward,” acknowledged Hasan Ikhrata, director of transportation policy and planning for the Southern California Association of Governments. “Something has to be done, and done fast, to keep this region competitive. Now the private sector has to step to the table.”

But money alone isn't enough

While capital improvements will go a long way towards helping the railroads keep up with demand, money alone isn't the only solution. Better use of existing technology and the willingness to embrace new technology, along with creative collaboration and working smarter are also required.

“Technology-based solutions will produce enduring results and predictable successes,” explained Carole Ishii, Assistant Vice President, Customer Relationship Marketing, BNSF Railway. She outlined several pilot programs that the company is conducting. One, called Business Exchange, has been in operation in Tacoma, Washington, since the middle of last year. “The collaboration is between two Class I railroads-UP and us-as well as port lines and port terminal operators.” Under the pilot program, port transportation providers share schedules and forecasts with the terminal operators and railroads in advance. “The pilot program has resulted in reduced dwell and increased velocity, capacity, and throughput,” said Ishii. “The transportation providers also have increased visibility as to which transportation party has physical possession of the equipment. Under the old method, transportation providers used manual methods like faxes and phone calls and they were forced to work independently of one another.”

In nearby Seattle, BNSF is also conducting a forecasting pilot to help rail hub operators do a better job of planning and coordinating trains, Ishii said.

Meanwhile, for nearly two years, BNSF has been testing new technology that will allow the company to operate more efficiently and safely. Electronic Train Management System (ETMS) has been used on 50 locomotives operating on 135 miles of track between the southern Illinois towns of Centralia and Beardstown. The system utilizes on-board computers, GPS, and other devices to run the trains and minimize the chance of human error, which is the leading cause of accidents.

“Our train crews take safe production to heart,” says Greg Stengem, Vice President, Safety, Training and Operations Support. “Thanks in large part to their efforts, we reduced our injury rate by about 34 percent and our derailment rate by about 23 percent from 1995 through 2003. We're testing ETMS to determine whether it will supplement crews' situational awareness.”

Although BNSF is interested solely in the safety aspects of the system, others in the industry see potential cost savings, particularly in the area of reduced crew size. Such an advanced system may possibly allow trains to operate with one-person crews, which according to a spokesman for the National Carriers' Conference Committee, the national bargaining agent for the railroads, are “central to the railroads' ability to remain competitive.”

At one time, train crews consisted of five people: a conductor, engineer, fireman and two brakemen. But crew sizes have been shrinking in recent years due to technological advances. Although the industry employed 1.8 million people in 1917, that number has whittled down to about 236,000 today. Yet, railroads are transporting four times more freight than they did a century ago.

According to some estimates, one-person crews could save railroads over $1 billion each year. “There are significant savings to be had,” affirmed one rail analyst.

The manufacturer of ETMS says the system has achieved 1,300 error-free runs. “We think it is working exactly like it is intended to work,” commented BNSF Corp.'s Rose. The railroad has already filed a product safety plan with the Federal Railroad Administration to get approval to roll out the system through its network. The plan, filed in December, is currently under review-a process that could take up to six months.

Railroads are also working together to get the most out of existing lines. Canadian National Railway (www.cn.ca) and BNSF recently agreed to track and rail infrastructure exchanges, principally in Vancouver, B.C., Chicago, and between Memphis and southern Illinois. Remarked BNSF Corp.'s Rose, “These agreements provide BNSF with increased capacity and dispatching efficiencies in Chicago and Memphis. In addition, we can now tap CN's surplus capacity between Memphis and Centralia, Illinois, to expand our ability to handle more traffic.”

CN's president and CEO, E. Hunter Harrison, concurred. “These agreements are smart railroading,” he said. “CN's track and rail infrastructure sharing agreements with BNSF Railway are creative means of improving network fluidity and increasing traffic density on our system.”

Another area that railroads are looking at for improved operational gains and efficiencies include on-dock rail, which has experienced double-digit increases for the past few years at the ports of Los Angeles and Long Beach. On-dock rail usage at the Port of Los Angeles was up 23 percent last year over 2004, while at the Port of Long Beach the increase was 27 percent. Combined, the ports handled more than 1.6 million container moves with on-dock rail, which equals about 21.3 percent of the total container volume.

Rail executives believe there's room for even more growth, providing the ports are willing to make some operational changes. Among these are increasing the numbers of hours each day that the railroads have access to on-dock yards, and modifying the current rules that prohibit railroads from simultaneously working adjacent tracks at the on-dock facilities.

While port officials are open to the suggestions, there are some limitations. For instance, the very first on-dock rail facilities were constructed at terminals that were originally designed solely for marine operations. Therefore, at some terminals the tracks run right through the middle of the terminal, which means only one handling operation-rail or vessel-can function at any given time. Typically, BNSF can cycle trains through its inland facilities two or three times each day, but because of the limited hours it can access the marine terminals' on-dock rail facilities, the company can only get one train per day in and out. Newer marine terminals that were built with an integrated on-dock rail operation usually place the railyard on the periphery of the terminal so it doesn't conflict with vessel operations.

One solution that seems more readily attainable, despite the preliminary environmental study requirement, is the addition of more storage tracks. The Port of Long Beach has designated a facility at Pier B for rail operations, which could be used as either a storage/staging facility or possibly as a working rail transfer yard. Furthermore, BNSF has suggested to the Port of Los Angeles that the LAXT coal terminal, which is currently not in use, would be ideal for a rail storage facility.

Another area that railroads are looking at to trim costs is in fuel consumption. The effort is not only commendable, but significant when you consider Union Pacific uses approximately 3.25 millions of diesel each day, making it the world's largest consumer of diesel. The railroad recently launched its Fuel Masters Program, which rewards train engineers who conserve the most fuel. A test of the program last year saved the company 16 million of gallons of diesel and $30 million. Some of the steps engineers are taking to cut consumption include starting gradually from a stop and throttling down and coasting when there is congestion ahead on the track. Railroads are also using more alternative fuel equipment, such as locomotives that run on liquid natural gas and battery-powered and electric hybrids for railyard equipment.

Not out of the woods yet

Although the rail industry is performing remarkably better than it has in decades, there are still some lingering service problems. YRC Worldwide Inc. (www.yrcw.com) CEO Bill Zollars recently blamed poor on-time rail performance for creating “inefficiencies in our networks,” while UPS spokesman Norman Black was even harsher. He told the Los Angeles Times that his company has paid $1.5 billion to “every railroad of consequence in North America” since the beginning of 2004 to transport UPS ground packages, but the worsening on-time performance was becoming intolerable. “If packages arrive an hour late by rail, that is a big deal to us. We have to hold people and pay them overtime for that hour.” Black added that the quality of rail service “is not what it should be in this country.”

And while BNSF is generally praised for running a tight organization, it has experienced some slipping. Freight car velocity has dropped from more than 205 miles a day in 2004 to 183 miles in 2005. At the same time, on-time performance has dropped from 92 percent in 2002 to 71 percent in 2005.

Nonetheless, the railroads are uniquely poised to capture more market share and restore customer confidence. There's much that's working in their favor at the moment. Aside from the strong earnings and increased demand that's propelling railroads down the track, the challenges confronting the nation's truckers, i.e. driver shortages and rising fuel prices, are working to the railroads' advantage, especially in the area of long-haul transportation.

Tom White of the Association of American Railroads summed it up recently when he remarked, “We have gone from having to chase freight business to having freight customers chase us.”

The trick going forward will be for railroads to deliver once the customer catches them. wt